Many people hear talk of quitting work entirely before age 65 and think it’s crazy talk. Surely this is something that rich people can do, but not me! I started with nothing!
News flash – most of us start with nothing.
“Nothing” can mean a lot of things.
Maybe it’s no belongings and no money, or maybe it’s starting with debt – but no matter where you’re starting, if you’re an able-bodied, hardworking individual then you can end up with plenty! And yes, you can retire early.
Following up to the example of the 45-year-old retiree from How to Retire Early – let’s look a little closer at the details.
A household spending $4250 per month post-tax needs a passive income of $5000 (which becomes $4250 after capital gains tax). They can earn that amount as dividends and interest from mutual fund or index fund investments after putting away $2700 every month for 20 years.
In this example, $2700 is about 40% of the total post-tax income.
Once these workers retire, they won’t need the whole 100% of their income. They only 60% to live exactly as they were living before retirement (except with a whole lot more free time).
If today your income goes to Taxes, Saving and Spending, tomorrow your income goes to Taxes and Spending – no more Saving.
This assumes two big things:
- The family or individual started without debt.
- They don’t earn another dime of active income after retirement.
Starting with debt just pushes the retirement out by however long it takes to pay off. If the retiree above has $27,000 in debt, he spends 10 months paying it off and retires 20 years after that. $65,000 in debt? He retires in 22 years.
As for the second assumption, the more active income you’re willing to earn after your official retirement, the sooner you can retire. If the retiree wants to make $500 on the side in retirement, then his passive income can drop to $4500, and he can retire a year earlier.
Mutual funds are my favorite way to earn passive income, but there are others, like rental property or royalties.
Readers: If you could do anything you wanted with your time starting tomorrow, what would it be?